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An Overview of Company Takeover

In today's era where the market is overgrowing and developing with the fast pace, technological advancement and modification of old technology with entire corporate restricting is a requirement of business entities. With the changing time & requirements, corporate undergoes a structural change to continue their work in up-gradation with advancement. For meeting the needs of these purposes, concepts of mergers & takeovers are emerging these days. Takeover with restructuring the basic framework to overcome with a new and innovative entity.

REGULATIONS GOVERNING & DEFINING TAKEOVER

A takeover is governed through the following provisions of companies act, 2013 along with SEBI regulations that are:

  1. Section 230(11) of Companies Act, 2013: any form of compromise or arrangement can include takeover.
  2. SEBI (Substantial Acquisition of Shares & Takeover) Regulation, 2011: In the case of listed companies, the takeover is governed & regulated by the provisions of SEBI
  3. Section 250(3) of Companies Act, 2013: tribunal may direct any company administrator to take over the assets & management of the Company.
  4. Section 261 of the Companies Act 2013: authorize the company administrator to prepare the scheme of revival & rehabilitation including the takeover of the sick company by a solvent company.

UNDERSTANDING TAKEOVER

Takeovers are very common practice these days. They are very much similar to that of the merger as both the process involves a combination of two companies into the formation of one company. Takeover involves two companies of different sizes as mainly large company takeovers smaller companies. If the company pursues the opportunistic takeover, it can get the fair value in the long term. Companies also enter into a strategic takeover where the company gets an opportunity to enter a new market with very less amount of time, investment and money involved.

TYPES OF TAKEOVER

  1. REVERSE TAKEOVER

  2. Reverse takeovers are also known as Bail Out takeovers. Such a form of takeover is undertaken by profit-earning concerns that bail out the financially weak company by taking over them. Though such a financially weak company is not a sick company. A reverse takeover is a strategy mostly opt by the Private Limited Company that acquires Public Company saving it from the lengthy procedure of conversion to public by conventional IPOs.

  3. FRIENDLY TAKEOVER

  4. Under this type of takeovers, bidders usually inform the Company's Board of Directors about the offer before making an offer to the outside Company. Usually, board & shareholders are closely connected, so private acquisition is usually friendly.

  5. HOSTILE TAKEOVER

A hostile takeover is a kind of forced takeover in which acquirer acquires the target company. Management of Target Company is unwilling to agree for the merger or is reluctant to any merger for takeover. A takeover is considered as Hostile if the Board of Target company rejects the offer, but the bidder continues to pursue it.

STEPS TO BE FOLLOWED TO TAKEOVER THE COMPANY

Step by step procedure to acquire the company is as follows:

  1. PLANNING:

  2. Make a list of reasons to buy a new company and plan accordingly. The following can be the reasons for any company to consider the takeover strategy:

    • Newmarket exposure
    • Technical innovation
    • Diversification
    • Enhance productivity & development
    • Optimum utilization of the human resource, raw material & all form of corporate resource.
    • Increased share in the market
    • Elimination of competition.
  3. BUILD A TEAM:

  4. Prepare the team for the smooth operation of the takeover. Build a team with following roles & responsibilities:

    • An executive helps to manage the team ensuring a successful takeover.
    • An investment banker can handle all the issues and mater concerning to finance involved in the takeover
    • The lawyer would understand the rules & laws applicable to the ownership transfer.
    • HR experts organize the staff for the new company.
    • IT specialist meets the technical and infrastructural needs of the new company.
  5. DUE DILIGENCE

  6. Under this step check the public information about the company. Check its job listing, web pages, check whether it is compliant on MCA, check its SEC filing is on time, etc. after contacting the company, meet the management, have a look at its inside administration, etc.

  7. DOCUMENTATION

  8. Prepare the following documents before executing takeover:

    • Non-disclosure Agreement
    • Letter of Intent
    • Confidential Information Memorandum
    • Indication of Interest
    • Purchase Agreement
  9. MAKE THE FIRST OFFER
  10. Make the first offer by keeping in mind that it’s not just a purchase of a company, but its goodwill and brand.

  11. NEGOTIATION
  12. Reach an agreement that is mutually agreed upon by the party. Neither of the party wants to suffer a loss, thus negotiate the term feasible & profitable for each party with the win-win situation.

  13. SIGNING OF A CONTRACT

Enter into a final contract with all the terms & conditions for the transferor & transferee both. Contracts are the end of the negotiation. Thus, signing the contract is the final step of the takeover of a company.

DIFFERENCE BETWEEN MERGER & TAKEOVER

Following are the difference between merger & amalgamation based on different criteria:

BASIS OF DIFFERENCE

MERGER

TAKEOVER

Definition

Two or more companies are combined to form a new separate company or one existing company absorbs the existing target company. The merger is a process of consolidation of multiple businesses into one business entity.

It is the legal act where one company acquires another company & becomes its new owner.

Dissolution

In the case of the merger both the company dissolves to form a new company.

The target company will cease to exist when one company acquires the target company,

Shareholding

The stock of both the firm is surrendered & fresh shares are issued in the new company.

Shares & stock of the target company is transferred to the acquiring company.

Size of the companies

In the case of a merger, both the companies are relative to the same size & structure.

Big company takeovers the small company and becomes the single owner of a forming company

Types

Types of mergers are horizontal, vertical, conglomerate, forward, backward & consolidation merger

Types of takeovers are friendly, reverse & hostile.

CONSIDERATION OF TAKEOVER

Following are the various form of consideration for takeover:

  1. CONSIDERATION IN THE FORM OF CASH:
  2. The full number of shares acquired can be paid through cash. Shares can be acquired either through a bid or through a share market.

  3. CONSIDERATION IN THE FORM OF SHARES:
  4. Under this method acquirer issue the shares to the shareholders of the target company. In exchange for such shares, Acquirer Company will purchase the shares of shareholders of Target Company.

  5. ACQUIRING THROUGH NEW COMPANY:
  6. A new company can be formed by acquiring shares in target companies & shares of the company can be allotted to both the companies.

  7. ACQUIRING MINORITY HELD SHARES:

The acquirer if holds 50% of the shareholding in Target Company, then the company can plan to acquire the balance equity also.

CONDITIONS TO BE FULFILED

  1. BY THE TRANSFEROR COMPANY:
    • The board of directors has to convene & held the board meeting for approving the takeover.
    • The offer received from the transferee company shall be circulated to all the members.
    • The consent letter must be filed with the registrar.
    • The scheme of the contract for the transfer of shares of the company to the shareholders of the target company shall be approved by the shareholders of the acquirer holding more than 9/10th in value of shares within 4 months.
    • Transferee company shall be registered as a holder of transferred shares of the company
    • Consideration received for the shares shall be transferred to a separate schedule bank.
  2. BY THE TRANSFEREE COMPANY:
    • The offer is made to the transferor company.
    • Copy of notice of general meeting & E-form is circulated by the transferor company.
    • The intimation is received from the transferor company of the approval of the offer.
    • Ensure that the notice has been sent to the dissenting shareholders of the transferor company and duly executed instruments of proof for the share transfer is also sent to the transferor company.

OBJECTS OF TAKEOVER

The takeover is usually practiced by the entity for pursuing the following objectives:

  • To effects savings and other day to day expenses by combining the resources.
  • To enhance the product development through innovation & integration of expertise of two different companies.
  • To diversify the business by acquiring companies with new product lines.
  • To improve the profitability and productivity by joining the efforts of technical, innovation & human resources of both the companies.
  • By optimum utilization of resources of both the companies, such takeover helps in creating synergies of shareholder’s wealth & value
  • Competition is eliminated up to a certain limit.
  • To achieve economies by mass production at economical rates.
  • To enhance the market value of its shares.

Frequently Asked Questions (FAQs)

Provisions of Section 395 of companies Act 2013 lays down the requirement for turnover of unlisted company & the takeover of a listed company is regulated by Clause 40A & 40B of the Listing Agreements.

The anti-takeover amendment is a strategy used as a defense-mechanism. Company amends its constitution, bye-laws, Article of Association, etc. for making itself less attractive to the corporate bidder.

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